Second Thoughts

When Saubermacher, a €205m Austrian waste disposal company, cancelled its debut on the Vienna Stock Exchange last January, chairman Hans Roth blamed stockmarket volatility. But he didn't rule out a flotation in calmer times. "If a miracle occurs, we could engage in one in the autumn," he told reporters.

There has been no miracle. Equity markets around the world plummeted as the year progressed, with many registering record drops as the economic outlook worsened. In turn, initial public offerings are scarce: there were 69 in Europe during the third quarter of the year, compared with 183 in the same period of 2007. The number of cancelled IPOs, meanwhile, is rising. (See "Getting Cold Feet" at the end of this article.) "It's very difficult to price an IPO in a volatile market and you can't get much more volatile than at the moment," says Tom Troubridge, head of the London capital markets group at PricewaterhouseCoopers.

Saubermacher was lucky. Erhard Schmidt, its CFO since January, says the company fielded several calls from private-equity groups and other funds interested in backing it for its planned flotation. Those calls continued even as the board hit the IPO road show. "We knew that the stockmarket was our preferred way [to tap funding] but we knew that we also had alternatives," Schmidt says. After cancelling its IPO, the company used short-term bank credit to invest in expansion until July, when it sold a 28% stake in its business to the UBS Global Asset Management fund.

Failing to float is a disappointment for any company, but in the long run some could benefit, says Simon Amies, a partner in the London office of law firm Covington & Burling. "Whoever survives this period without having to raise money in the markets will show that they have managed to get through a difficult time with private investment or [venture capital] backing, used their resources effectively and executed on their business plan," he says. "Those companies will be attractive when the market comes back."

Ready for the WorstMany companies are not as fortunate as Saubermacher. If there's a lesson for CFOs from the recent spate of scrapped IPOs, it's that whatever funding method a company has lined up, it must have an alternative to fall back on. Virginie Lazès, a Paris-based partner of investment bank Bryan Garnier, says that puts pressure on finance chiefs who might once have assumed a stockmarket launch was a guaranteed route to new capital: "Where do you find the money [if the IPO doesn't succeed]?" Lazès asks. "That's the big question."

And there are no easy answers. Companies can spend months slaving over the requisite paperwork and investor communications when going public. During that time, it can be difficult enough to keep an eye on the day-to-day business, let alone run another funding project in tandem with the IPO.

But CFOs who rise to the challenge are often glad they did. Sinosol, a German solar-power company, cancelled its €79m IPO on the Frankfurt Stock Exchange in June, blaming market volatility. CFO Raphael Krause, one of the company's co-founders, describes pulling the deal as "one the toughest days of my life" and an event that took "some weeks" to recover from. No wonder — Krause estimates that costs linked to the IPO process stood at about €1.5m, not an insignificant sum for a company that expects 2008 revenues of about €150m.

Like Saubermacher's Schmidt, though, Krause had made other plans during the run-up to the IPO. "We were always considering the alternative, that something might happen on the stock market and we could not take the company public," he says. To that end, Krause organised a bond to raise €10m for the company in case the flotation was called off. It was a triumph of gut instinct over professional advice: Krause says the company's advisers told him that organising alternative funding could make the IPO less attractive to investors. It's a good thing that Krause ignored that advice. If Sinosol had lacked an alternative source of money when it scrapped the IPO, "we would have had a serious liquidity problem," the CFO says.

Mark Howard, an associate at law firm Charles Russell, understands some advisers' scepticism about alternative funding — any such project should be kept "below the radar" during the IPO process, he says — but recommends that CFOs have it in place. A credible plan B might involve private funding from institutions or tapping existing shareholders. As a last resort, a company may even offload non-core assets to make it more attractive to investors. This last option is "desperation, really," admits Clive Hopewell, a Charles Russell partner, but desperate times often call for desperate measures.

Krause still hopes that Sinosol will go public, although he admits that in the current market it's "very difficult" to know when. Analysts agree that the window is currently closed. "Investors are pretty shell-shocked at the moment," says PwC's Troubridge. "The last thing they're going to want to do is invest in an IPO." Troubridge doesn't expect the market to pick up again until the second quarter of 2009. Other advisers suggest a recovery will be even later.

Silver LiningWhile companies wait to see when the markets turn, some CFOs might count their blessings that they didn't take their company public just as investors started to shy from equities. "The attractiveness of [London's] AIM [exchange] in particular was the ability to keep tapping in to that same wall of capital," says Amies at Covington & Burling. "That's closed. So CFOs with dwindling cash are now thinking, 'I'm a public company, I'm supposed to be keeping the market informed as to what's going on and I'm running out of money.' That is really stressful and I think those CFOs are the ones who are sweating it at the moment."

Saubermacher's Schmidt, for one, has got over the disappointment of cancelling the company's IPO. "If we were now a listed company, I expect that I would spend 50% of my time on communicating with investors and the financial community," he says. "Now I can fully focus on the business." And when he looks at current turmoil on the stockmarkets, is he happy to be a finance chief of a private rather than listed company? "To be honest, at the moment I am glad," he says with a laugh.